Deck 15: Economic Regulation and Antitrust Policy

Question 1

Which of the following is the best example of a natural monopoly?

A) gold mining in the Colorado Rocky Mountains
B) filmmaking in Hollywood
C) electrical service to homes in Seattle
D) production of film by Kodak
E) production of computers by IBM

Answer 1

C

Question 2

A natural monopoly, such as the local telephone company, is characterized by

A) a lack of natural competitors
B) low fixed costs and diseconomies of scale
C) economies of scale
D) a lack of government regulation
E) constant costs of production

Answer 2

C

Question 3

Government regulation of the prices and entry conditions in an industry is an example of

A) safety regulation
B) economic regulation
C) Herfindahl regulation
D) antitrust regulation
E) Social Security legislation

Answer 3

B

Question 4

If a firm has a downward-sloping long-run average cost curve over the entire range of market demand, it is a

A) local monopoly
B) resource monopoly
C) monopsony
D) output monopoly
E) natural monopoly

Question 5

Government regulation of the prices charged by monopolies is an example of

A) safety regulation
B) economic regulation
C) Herfindahl regulation
D) antitrust regulation
E) antimerger regulation

Question 6

Economies of scale throughout the range of market demand give natural monopolies

A) downward-sloping long-run average cost curves
B) upward-sloping long-run average total cost curves
C) upward-sloping long-run average cost curves
D) upward-sloping short-run average total cost curves
E) horizontal long-run average cost curves

Question 7

Government controls of price, output, entry of new firms, and quality of service in industries where monopoly appears desirable are known as

A) antitrust regulation
B) economic regulation
C) social regulation
D) antimerger regulation
E) consumer advocacy regulation

Question 8

Public utilities are either government-owned or government-regulated firms.

Question 9

Economic regulation is government policy designed to

A) improve health and safety in products and in working conditions
B) prevent firms from monopolizing or developing a cartel in existing competitive markets
C) eliminate existing monopolies by breaking them apart into many smaller firms
D) create monopolies by forcing competitive firms to merge
E) control price and output in industries where monopoly is desirable

Question 10

A natural monopoly exists when, throughout the range of market demand,

A) average cost is increasing
B) there are diseconomies of scale
C) there are economies of scale
D) average cost is constant
E) marginal cost exceeds average cost

Question 11

A monopoly is likely to charge a higher price than an otherwise similar competitive industry would be.

Question 12

Which of the following is not a criticism of monopolies?

A) They restrict output.
B) They set price above the perfectly competitive level.
C) They tend to be less innovative than firms in a competitive market.
D) They exert a disproportionate amount of political influence.
E) They reduce allocative efficiency through perfect price discrimination.

Question 13

In a natural monopoly, throughout the range of market demand,

A) marginal cost exceeds average cost and therefore pulls average cost upward
B) average cost exceeds marginal cost and therefore pulls marginal cost upward
C) marginal cost is below average cost and therefore pulls average cost downward
D) average cost is equal to marginal cost
E) there are diseconomies of scale

Question 14

A natural monopoly exists when, throughout the range of market demand,

A) average cost is increasing
B) there are diseconomies of scale
C) average cost is decreasing
D) average cost is constant
E) marginal cost exceeds average cost

Question 15

Public policy can help achieve more efficient use of an economy's resources by eliminating all monopolies.

Question 16

If a firm can double inputs and, thereby, more than double output over the range of output the market demands, it is said to be experiencing

A) decreasing minimum efficient scale
B) increasing returns to scale
C) constant returns to scale
D) decreasing returns to scale
E) increasing long run average cost

Question 17

Economic regulation of business is justified if, by intervening, government can

A) improve the allocation of resources in society
B) create economic rents for special interest groups
C) reduce output and increase prices for an industry
D) increase tax revenue from the regulated industry
E) force firms to increase their costs of production

Question 18

Which of the following occurs if firms are able to restrict output and raise price?

A) resources are misallocated
B) wealth is shifted from consumers to government
C) wealth is shifted from producers to consumers
D) P = MC
E) P = minimum LRAC

Question 19

Government attempts to prohibit monopolization of a market are known as

A) antitrust regulation
B) economic regulation
C) social regulation
D) anticompetitive regulation
E) Herfindahl regulation

Question 20

If a firm can double inputs and, thereby, more than double output over the range of output the market demands, it is a

A) natural monopoly
B) local monopoly
C) price discrimination monopoly
D) monopsony
E) candidate for antitrust prosecution

Question 21

Watt Power and Light, an electric company, will suffer an economic loss

A) even at its profit-maximizing output because marginal cost is always less than average cost
B) even at its profit-maximizing output because average cost is always less than marginal cost
C) if regulators insist that it produce where price equals marginal cost because marginal cost is less than average cost
D) if regulators insist that it produce where price equals marginal cost because average cost is always less than marginal cost
E) if regulators insist that it produce where price equals average cost because average cost is always less than marginal cost

Question 22

Compared to the profit-maximizing outcome, marginal cost pricing in natural monopoly leads to

A) reduced demand
B) higher price
C) reduced consumer surplus
D) more economic profit
E) greater output

Question 23

If government regulators force a natural monopoly to produce where price equals marginal cost, the monopoly will earn

A) a "fair return"
B) positive economic profit
C) zero economic profit
D) negative economic profit
E) greater economic profit than if it were unregulated

Question 24

Which of the following is true when regulators require a natural monopolist to set price equal to marginal cost?

A) This policy results in a less than socially optimal allocation of resources.
B) The marginal cost of producing the last unit sold exceeds the consumers' marginal value for that last unit.
C) The monopolist will face recurring losses unless a subsidy is provided.
D) The monopolist will earn a normal profit.
E) The monopolist will earn more than a fair return.

Question 25

If the electric company is allowed by regulators to earn only a normal profit, it will produce at the point where

A) MR = MC
B) P = MC
C) MC = quantity demanded
D) P = AC
E) MR = AC

Question 26

The rail system in Metropolis is a natural monopoly. If the government regulates the system by setting the fare equal to marginal cost, which of the following will be true?

A) The managers of the rail system will be allowed to adjust marginal cost so that they can get a normal rate of return on capital.
B) The managers of the rail system will be allowed to adjust marginal cost so that they can get a fair profit.
C) The rail system will earn economic profit at that fare.
D) If the government doesn't give the rail system a subsidy to supplement revenue from fares, the system will face continuous economic losses.
E) If the government doesn't give the rail system a subsidy to supplement revenue from fares, fare increases will push marginal cost upward.

Question 27

The average cost curve for a natural monopoly is downward sloping where it intersects the market demand curve.

Question 28

The rail system in Metropolis is a natural monopoly. If the government regulates the system by setting the fare equal to marginal cost, which of the following will be true?

A) Price and output will be higher than if the monopoly were unregulated.
B) Price and output will be lower than if the monopoly were unregulated.
C) Price will be lower and output higher than if the monopoly were unregulated.
D) Price will be higher and output lower than if the monopoly were unregulated.
E) Profit will be lower than if the monopoly were unregulated, but price and output could either increase or decrease.

Question 29

In order to ensure allocative efficiency on the part of a natural monopoly, regulators would set price equal to marginal cost.

Question 30

NARRBEGIN: Exhibit 15-2
Exhibit 15-4

The welfare loss associated with the unregulated natural monopoly in Exhibit 15-4 is shown by the area

A) cef
B) abc
C) adf
D) dfeg
E) bcfd

Question 31

Production by a monopoly would result in the socially optimal allocation of resources if

A) price is set equal to marginal cost
B) marginal revenue is set equal to price
C) marginal revenue is set equal to marginal cost
D) price is set equal to average total cost
E) marginal revenue is set equal to average total cost

Question 32

NARRBEGIN: Exhibit 15-1-2
Exhibit 15-5

If the natural monopoly in Exhibit 15-5 is regulated so that it earns a normal profit, then

A) P = $24 and Q = 8
B) P = $22 and Q = 6
C) P = $24 and Q = 5
D) P = $20 and Q = 8
E) P = $18 and Q = 5

Question 33

NARRBEGIN: Exhibit 15-2
Exhibit 15-4

In Exhibit 15-4, the consumer surplus that results from an unregulated monopoly, is shown by area

A) abc
B) adf
C) cef
D) dfeg
E) bcfd

Question 34

If a regulator sets the price equal to the natural monopolist's marginal cost,

A) the monopoly will experience a loss
B) the monopoly will earn a profit
C) the monopoly will earn zero profit
D) consumers will be worse off than they would be if the firm's profit maximization activities were unregulated
E) the monopoly will be better off than it would be if its profit maximization activities were unregulated

Question 35

Natural monopolies are firms that

A) have a downward-sloping long-run average cost curve over the entire range of market demand
B) have an upward-sloping long-run average cost curve over the entire range of market demand
C) are protected against the entry of new firms by patents, licenses, or other legal restrictions
D) control a nonreproducible resource that is critical to production
E) have been created over time by the mergers of many smaller firms

Question 36

NARRBEGIN: Exhibit 15-2
Exhibit 15-4

In Exhibit 15-4, the consumer surplus that results from a regulated monopoly that charges a price equal to MC, is shown by area

A) abc
B) adf
C) cef
D) dfeg
E) bcfd

Question 37

Most local phone companies

A) face a horizontal demand curve
B) are regulated
C) are called public utilities
D) have tremendous economies of scale
E) are natural monopolies

Question 38

NARRBEGIN: Exhibit 15-2
Exhibit 15-4

In Exhibit 15-4, the increase in consumer surplus that occurs when price is set equal to marginal cost rather than at the profit-maximizing level, as it would be in an unregulated monopoly, is shown by area

A) abc
B) adf
C) cef
D) dfeg
E) bcfd

Question 39

NARRBEGIN: Exhibit 15-1-1
Exhibit 15-3

If regulators set price equal to marginal cost for the natural monopoly in Exhibit 15-3, then from the usual profit-maximizing position, price changes from

A) $24 to $18, and quantity increases from 5 to 8
B) $14 to $20, and quantity increases from 5 to 8
C) $24 to $18, and quantity remains unchanged
D) $24 to $18, and quantity increases from 5 to 8
E) $24 to $22, and quantity increases from 5 to 10

Question 40

The rail system in Metropolis is a natural monopoly. If the government regulates the system by setting the fare equal to marginal cost, which of the following will be true?

A) Profit will be zero under regulation.
B) Only normal profit will be earned under regulation.
C) Accounting profit will be zero under regulation.
D) Economic loss will occur under regulation.
E) Profit will be higher than if the monopoly were unregulated.

Question 41

Producers play a disproportionately large role in influencing public regulation because they have a strong interest in matters that affect their specialized source of income.

Question 42

If a monopolist is forced to set price equal to average total cost, economic profit

A) will be negative, and the monopolist may go out of business
B) will be zero
C) will be positive
D) will be negative, and the firm will stay in business if there are significant fixed costs
E) may be positive, negative, or zero

Question 43

To allow a public utility (which is a natural monopoly) to earn only a normal profit, the government should

A) do all of the following
B) set price equal to average cost
C) equate marginal cost and average cost
D) set marginal cost equal to marginal revenue
E) set price equal to marginal cost

Question 44

Which of the following is likely to result from the regulation of taxicabs in Mexico City?

A) The price of taxi rides will decrease.
B) The price of taxi rides will increase.
C) The income of taxi owners will increase.
D) Taxi owners will have greater monopoly power.
E) The supply of taxis will decrease.

Question 45

Which of the following is true of a natural monopoly?

A) If regulated, the firm will have a higher level of output than an unregulated firm, whether the regulation is based on average cost, marginal cost, or normal profit.
B) If regulated, the firm will have a lower level of output than an unregulated firm, whether the regulation is based on average cost, marginal cost, or normal profit.
C) If regulated, the firm that is only allowed a normal profit will be allowed to charge a price in excess of its average cost.
D) If regulated, the firm that is only allowed a normal profit will be allowed to produce more than a firm that must set a price equal to its marginal cost.
E) If regulated, the firm that is only allowed a normal profit will be allowed to produce more than a firm that must set a price equal to its average cost.

Question 46

A physicians' professional association supports legislation seeking higher quality medical care. According to the special interest theory of regulation, who likely will benefit most from this legislation?

A) Government, through decreased regulation of physician quality.
B) Patients, through reduced prices for medical care.
C) Physicians, through increased prices for medical care.
D) Hospitals, through decreased for physicians' services.
E) Government, since higher quality health care is clearly in the public interest.

Question 47

Compared to the profit-maximizing outcome, average cost pricing in natural monopoly leads to

A) all of the following
B) a higher price
C) decreased consumer surplus
D) the elimination of economic profit
E) less output

Question 48

NARRBEGIN: Exhibit 15-3
Exhibit 15-6

If regulators allow the natural monopolist in Exhibit 15-6 to earn only a normal profit, it will produce an output equal to

A) 0
B) g
C) h
D) i
E) j

Question 49

Suppose the local government is considering using marginal cost pricing to set rates for a cable TV company. Which of the following arguments supports marginal cost pricing?

A) Marginal cost pricing gives the monopoly economic profit and a reason to stay in business.
B) Marginal cost pricing gives the firm a normal economic profit and a reason to stay in business.
C) Marginal cost pricing is allocatively efficient.
D) Average cost pricing requires subsidies, which can be costly.
E) Average cost pricing forces monopolies to operate at a loss.

Question 50

Which of the following groups benefits from regulation, according to the special interest theory of regulation?

A) all consumers
B) all producers
C) only certain consumers
D) only certain producers
E) society as a whole

Question 51

If the government wishes to provide a natural monopolist with a "fair" rate of return, it will force the firm to set

A) P = MC
B) P = AC
C) P = MR
D) P = AVC
E) MR = MC

Question 52

According to the special interest theory, the licensing of beauticians would be

A) desired by consumers in order to promote the public interest
B) desired by beauticians in order to promote the public interest
C) discouraged by all beauty salons, large or small
D) desired by some beauticians in order to restrict entry into their profession
E) done strictly at the initiative of the government

Question 53

A regulated natural monopoly that must set price equal to average cost will

A) suffer an economic loss
B) earn a net economic profit
C) earn a normal profit
D) earn so little that it will close in the long run
E) earn no profits of any kind

Question 54

NARRBEGIN: Exhibit 15-3
Exhibit 15-6

If it is allowed to earn only a normal profit, the regulated natural monopoly in Exhibit 15-6 will set price equal to

A) a
B) b
C) c
D) f
E) e

Question 55

The capture theory of regulation, espoused by George Stigler, asserts that

A) consumers "capture" regulatory agencies so that regulation favors consumers
B) producers "capture" regulatory agencies so that regulation favors producers
C) regulators "capture" producers and limit their market power
D) consumers "capture" some consumer surplus lost to monopoly
E) consumers and producers work together to "capture" regulatory agencies in order to achieve more desirable regulation

Question 56

If the government wants a natural monopoly to earn a "fair return" or zero economic profit, it will set

A) price equal to marginal cost
B) price equal to average total cost
C) price equal to average revenue
D) marginal cost equal to marginal revenue
E) marginal cost equal to average total cost

Question 57

NARRBEGIN: Exhibit 15-3
Exhibit 15-6

If regulators allow the natural monopolist in Exhibit 15-6 to earn only a normal profit, it will result in an increase in consumer surplus compared to the profit maximizing result.

Question 58

If producers support proposed regulation of their industry, then

A) it is likely that consumers will benefit from the regulation
B) it is likely that producers are looking out for the interests of the consumers
C) it is likely that both producers and consumers will be adversely affected by the legislation
D) it is possible that consumers will be adversely affected by the legislation
E) it is likely that prices will fall

Question 59

When government regulations force a natural monopoly to produce where price equals average total cost, social welfare is

A) maximized
B) less than it would be without regulation
C) greater than it would be without regulation, but it is not maximized
D) exactly the same as it would be without regulation
E) minimized

Question 60

The government often enacts regulation that benefits producers because

A) the government seeks to regulate in the best interest of the public
B) consumers have less information than producers and therefore seek government protection
C) consumers have a strong interest in matters that affect their standard of living
D) producers have a strong interest in matters that affect their specialized source of income
E) producers seek to act in the best interest of the public

Question 61

Price discrimination that substantially lessens competition is prohibited by the Clayton Act.

Question 62

According to the special interest theory,

A) economic regulation is designed to promote social welfare
B) producers may be able to influence regulators to impose restrictions favorable to producers
C) groups of consumers with special interests may be able to control a regulatory agency to their own benefit
D) foreign lobbyists may be able to control a regulatory agency to their own benefit
E) the fighting between special interest groups over economic regulation may cancel out effects of such regulation

Question 63

Regulation that intends to improve the quality of service provided by carpenters will tend to increase the price of their services.

Question 64

A natural monopoly is a firm that experiences economies of scale over the range of market demand.

Question 65

The achievement of the optimal allocation of society's scarce resources requires that regulators set prices equal to firms marginal cost.

Question 66

Antitrust policy is designed to

A) improve health and safety in products and in working conditions
B) regulate the firms in industries where "cut-throat" competition is potentially damaging
C) create monopolies by forcing competitive firms to merge
D) control price and output in industries where monopoly is desirable
E) promote competition and reduce anticompetitive behavior

Question 67

The Sherman Antitrust Act makes it unlawful for firms to collude to restrain trade.

Question 68

Which of the following is a likely result of the deregulation of the airline industry that might benefit consumers?

A) a wage increase for union pilots
B) a possible decline in airline safety
C) one firm's emerging as an unregulated monopoly
D) loss of service to unprofitable routes
E) a decrease in air fares

Question 69

When regulating a natural monopoly, the regulating agency should set price equal to marginal cost.

Question 70

A monopoly or group of firms acting together as a monopoly

A) cannot perform the economic task of resource allocation
B) allocates resources in the most efficient way possible
C) misallocates resources by producing more output than a competitive industry would
D) misallocates resources by producing where the marginal benefit of the final unit produced exceeds its marginal cost
E) misallocates resources by producing where the marginal benefit of the final unit produced is less than its marginal cost

Question 71

The Clayton Act prohibits all horizontal mergers, regardless of their economic consequences.

Question 72

Between 1958 and 2000, competition in the US has remained relatively constant.

Question 73

Horizontal mergers involve firms in different industries.

Question 74

If ball-bearing producers support proposed regulation of their industry, then it is likely that

A) ball-bearing prices will decrease under regulation
B) profits of firms in the ball-bearing industry will decrease after regulation
C) ball-bearing producers are concerned about the best interests of the public
D) ball-bearing producers will not attempt to influence the adoption of the regulation
E) consumers of ball-bearings will suffer from the proposed regulation

Question 75

Which of the following would fall under the "rule of reason doctrine?"

A) General Motors colludes with Ford to fix the price of their cars
B) Coke and Pepsi collude to limit the quantity of soft drinks on the market
C) Intel dominates the market for computer processors with a 95% market share
D) Reynolds American, Inc. and Lorillard, Inc. agree to limit the introduction of new cigarette brands
E) two local restaurants agree to increase their prices by 10%

Question 76

Industry A has four firms, each with a 25% market share while industry B has four firms, one firm with a 70% market share and the other three firms with 10% each. According to the Herfindahl-Hirschman Index, industry A is more highly concentrated.

Question 77

The purpose of antitrust laws is to

A) reduce anticompetitive activities
B) increase anticompetitive activities
C) guarantee worker safety
D) promote quality products
E) prevent large-scale production

Question 78

Economic regulation aims to control the price, output, the entry of new firms, and the quality of service in industries in which monopoly appears inevitable or even desirable.

Question 79

Which of the following best illustrates a vertical merger.

A) GM merges with Chrysler
B) Nike merges with Kraft Foods
C) Microsoft merges with Dell
D) UPS merges with FedEx
E) Apple merges with IBM

Question 80

Antitrust laws attempt to promote competition by controlling

A) market structure only
B) market conduct only
C) market structure and performance
D) market structure and conduct
E) market structure, conduct, and performance